Taking Ownership

The way John Tomlinson sees it, managing the roll-your-own(RYO) and make-your-own(MYO) cigarette department in 70 of his 124 Duchess Shoppes puts a new twist on the term “micromanagement.”

Tomlinson, merchandising director for Heath, Ohio-based Englefield Oil Co., knows that RYO/MYO is a small sample size of the overall tobacco category; his tobacco fortunes don’t rise and fall on the volume performance of RYO.

“It’s like when Chrysler was recovering from the auto bailout and doubled their car sales. The thing is, they sold two cars in a quarter, up from one the quarter before,” Tomlinson jokes. “You have to keep roll-your-own in perspective.”

He tempers that stance on the diminutive segment by adding: “While RYO is a small contributor to the overall category in our 70 stores, when it’s growing, it’s a bellwether for our entire tobacco stock.”

RYO/MYO cigarettes seem to have withstood the punch of 2009, when a sweeping federal excise tax increase to finance expansion of the State Children’s Health Insurance Program (SCHIP) disproportionately struck the RYO/MYO segment. The tax upset the momentum that mainstream RYO brands had forged: A report by the Center for Disease Control and Prevention (CDC) indicated that from 2000 to 2011, consumption of loose tobacco—including RYO—and cigars increased 123%.

These days, RYO volume growth is coming from premium brands (such as Peter Stokkeby and Gambler) on the high end and budget brands on the low, with midlevel mainstream brands getting squeezed, industry analysts say. Premium brands continue to maintain annualized growth through a loyal customer base that demands quality, while budget brands such as pipe tobacco, which some call an RYO “knockoff,” appeal to consumers who felt sticker shock from the triple-digit-percentage tax spike in theRYO/MYO sectors.

To wit: Pipe tobacco’s tax, as part of SCHIP, jumped from $1.09 to $2.83 per pound; RYO/MYO soared from $1.09 per pound to $24.78.

“The folks that switched to pipe tobacco switched for good,” says Jesper Kjaergaard-Jensen, director of marketing for Tucker, Ga.-based Scandinavian Tobacco GroupLane Ltd., which offers the upscale PeterStokkeby brand as well as Bugler and Kite.“The value-oriented smoker fled in droves[to pipe tobacco], and they might only return to the middle-level brands if and when the playing field on taxes is level.”

Retailers such as Tomlinson say that each year since the tax went into effect, sales of RYO have continued their upward ascent. In his case, ambitious category management is commensurate with results. “We‘ve seen sales grow each year since 2010, and by the end of 2013 I’m looking at double-digit sales growth projections across the segment,” says Tomlinson. Republic Tobacco’s higherend Gambler variety serves as the topselling brand in most Duchess Shoppes.

Tomlinson aims always to be price competitive, displaying the product in a2-foot rack behind the counter in most stores. “I feel our prices rival the specialty tobacco stores,” he says. “I hear from customers that the freshness and quality of the product is what sustains their interest in this smoke.”

The real challenge for Tomlinson is the fact that RYO is a small tobacco segment, coupled with the fact that so many tobacco products beckon for consumer attention within the total tobacco universe. Consumers have become more knowledgeable about products such as moist smokeless and electronic cigarettes, seeing the distinction of the products.

Some consultants believe the retailer coalition needs to better communicate the value proposition of roll-your-own to get the same push for RYO. “We’ve seen mainstream brands flatten this past year [from the losses], which is actually a positive indicator,” says Lou Maiellano, president of Sevierville, Tenn.-based TAZ Marketing & Consulting Group.

“I encourage retailers to take a closer look at RYO from all angles because it can be a vibrant and profitable segment,” he says.

Destination: RYO

A growing number of c-store retailers have worked to make their stores onestop destinations for many categories. Industry experts say appealing to consumers for all their tobacco needs is entirely doable in competing with specialty tobacco stores.

For starters, c-stores realize that the RYO conversation is not a “chain wide initiative but a store-by-store proposition,” Maiellano says. Admittedly, that’s a hard approach to adopt. “The key is drilling down into the local market demographic to determine RYO’s place in a tobacco lineup, because it can help round out a tobacco portfolio.”

Steve Sandman, senior vice president of Glenview, Ill.-based Republic Tobacco Co., acknowledges that one prevailing c-store challenge is that “consumers have always flocked to the tobacco outlets due to selection and pricing.”

Maiellano reinforces this tendency.“Tobacco shops have never lost focus on this part of the business as consumers continue to seek quality,” he says. “They have stayed the course and kept the focus on quality and value. Basically, anyone seeking a quality smoke and a solid value proposition will always view the tobacco stores as the destination stop.”

Understanding this challenge, savvy c-store operators “have figured this outland begun to peel away consumers by expanding their RYO/MYO departments, and taken away consumers from the outlets,” Sandman says.

In addition to competition from specialty stores and other tobacco products, retailers must closely examine latter-day geographic trends that dictate an RYO selling opportunity. For instance, some retailers see little upside for roll-your own in urban locations, because it’s long been a rural bastion. Also, it has established strong following in Western states such as Idaho and Montana, Plains states such as Nebraska, and the Deep South.

“Certainly, the market has grown to the point where we really don’t consider any market a niche market any longer. A product like Gambler Tubes, which was mainly a very regional product, now sells extremely well from coast to coast, corner to corner across the country,” says Sandman, whose company also offer stop, Tube Cut and Drum brands.

Indeed, Tomlinson of Englefield Oil says that while his rural stores are the ones that have sustained RYO sales the most, he is now seeing growth in urban markets such as Columbus, Ohio, fueled by younger users intrigued by new options. It’s ill advised, he says, for retailers to make assumptions about where RYO has—or doesn’t have—a budding sales opportunity.

Separately, the growth of e-cigarettes has been an X-factor affecting RYO/MYO, including the exploding Internet sales driving trial for this product. Sandman acknowledges that fact; however, he says, “while they are getting a lot of hype these days, the overall [e-cig] volume is relatively small and we have seen no impact. Many of our smokers are well-educated about tobacco, and prefer our products.”

Anne Flint, senior category manager of tobacco/OTP for Framingham, Mass.-based Cumberland Farms, says e-cigarette sales growth has “skyrocketed” in many of her 600 stores in 11 East Coast states since three brands debuted in late 2011. The accumulation of so many tobacco options has made her become more nimble with category management strategies, including approaches taken with RYO.

“There is a market for it in our 11-state region,” she says. “In 40 to 50 high-velocity stores I have about a 2-foot rack with six shelves, and it’s a full program. In some stores, there’s no room for it. We found that stores in both Maine and New Hampshire generate the most lift. But we will expand RYO when we get customer requests.”

The report card for retailer success with RYO is currently a mixed bag. “Some c-store retailers such as Circle K, who truly embrace the category, do extremely well with it,” says Sandman. “We have other retailers that can be right across the street that virtually ignore this category. Some expanded and enhanced their departments, while others are still sitting on the sidelines.”

One silver lining is that RYO is fully capable of bringing new users into the segment. “New users are waiting to be recruited, but you have to implement the right strategies to drive trial,” says Tomlinson of Englefield Oil.

To garner trial, Tomlinson recently began offering Republic Tobacco’s Tin Star brand, a small-size 0.30 ounces that prices at $3 a package. “Tin Star is smaller and lighter and it’s been a good draw,” he says.

Price points for RYO in Duchess Shoppe range from about $15 for a 1.6-ounce package to as low as the Tin Star price point. The most regularly sold package inmost Duchess Shoppes is the 0.64-ounce pouch, at $3.75 to $4 (includes 32 cigarette papers). Tomlinson strives for a 35% margin on RYO—drawing that expectation down from 40% a few years ago.

“I think there is a curiosity behind this segment—not unlike what we saw with e-cigarettes: More people want to know more about RYO, and I think people are looking for variety within the entire tobacco category,” says Tomlinson. “Roll-your-own is flying under the radar, and when smokers become aware of it, they try it. The quality of taste is what many see as the payoff.

DIY and Accessorize

The typical RYO user seeks quality and value, all within a do-it-yourself mentality: They don’t mind rolling their own smokes in return for quality, plus the associated cost advantage. With many of the rolling station stores out of business following the 2009 tax, more RYO users have invested in their own rolling stations—at around $90 to $100 a pop for a quality device.

John Tomlinson, director of merchandising for Heath, Ohio-based Englefield Oil, with 124 Duchess Shoppes in Ohio and West Virginia, says c-stores have a hard time stocking the standard-size rolling machines, so they sell smaller and less expensive units for $15 to $30.

“Some stores remain that sell the tubes and loose tobacco without the option of having it rolled in the store,” explains Steve Sandman, senior vice president of Glenview, Ill.-based Republic Tobacco Co. “Some sell rolling machines that create one cigarette at a time that customers can purchase and use in their home.”

While a carton of cigarettes costs more than $60, roll-your-own can sell for $26.99, says Sandman, who has seen “dramatic increases for the Top-O-Matictabletop injector, and very favorable increases across all other accessories.”

Premium Rush

C-store retailers are trying to rebuild sales of mainstream brands after the SCHIP tax increase of 2009 roiled volume and squeezed these brands significantly. What is surprising to one manufacturer is how underrepresented premium roll-your-own brands have historically been in c-stores.

Jesper Kjaergaard-Jensen, director of marketing for Tucker, Ga.-based Scandinavian Tobacco Group Lane Ltd., is surprised that premium RYO brands such as ST’s Peter Stokkeby have experienced meager brand representation in c-stores. He believes “c-stores are missing out on a wonderful opportunity.”

Also, Kjaergaard-Jensen says mainstream brands such as ST’s Bugler and mentholbased Kite continue to face an uphill climb in the c-store channel for additional shelf space until the playing field is leveled from a tax standpoint.

Bugler and Kite brands, for example, have a suggested retail price of $3.75 to $4 for a 0.64-ounce pouch; however, consumers grew accustomed to plopping down $1.75 to $2 for budget pipe tobacco brands, then settled into that smoking mentality.(Manufacturers such as ST and Republic Tobacco emphasize that the cheaper pipe tobacco package doesn’t include papers, thus makes the price advantage deceiving.)

“If and when we see some type of tax equalization, I think that’s when you will see a shift back to the midlevel brands,” says Kjaergaard-Jensen. Meanwhile, as it relates to premium brands, core consumers “never went away. They expect the premium smoking experience and demand quality and never traded down regardless of the retail channel in which they shop.”

Plunge in oil prices sets the stage for record margins and boost in in-store sales. Also In This Issue: Profitability skyrockets for top performers! Other channels seek to redefine convenience! The economy enters a new stage. The growing health-and-wellness trend. Fuel demand; oil's slide; multicultural momentum; and data, data, data!

Since 2003 CSP magazine has ranked No. 1 in readership and market share over all other industry publications. C-store marketers have identified CSP as the preferred magazine source for their trade marketing communications. With industry-leading, highly targeted circulation to more than 100,000 subscribers, CSP reaches the key convenience retailing decision-makers fifteen times a year.